Grow Your Business With These Small Business Financing Options

Even though small businesses don’t have the same operating costs as larger organizations, additional funds are sometimes necessary. Whether the business needs funding to stabilize cash flow or to expand, small business financing could help. Smaller companies don’t have as many options with financing because they tend to have less predictable revenue. Nevertheless, good options exist. Check out what’s needed to obtain small business financing, when to seek financing, and some options to consider.  

What Is Needed To Obtain Financing For A Small Business?

The requirements to obtain small business financing vary depending on the type of financing and the lender. However, there are some general pre-requisites to meet before seeking outside funding to ensure the best chance of approval. Remember, half of small businesses fail within the first five years. Therefore, it is critical to have all ducks in a row before expecting to persuade a lender to consider a loan application.

A few things a lender may want to see include:  

• Up-to-date financial statements for the business
• Personal financial statements showing both assets and liabilities
• Annual revenue projection for the next few years 
• Willingness to sign a personal guaranty  

In addition, most lenders will want to see that the business is profitable. To prove this to a lender, good annual projections are important and up-to-date financial records are necessary. Make sure the documents show a clear breakdown of revenue minus the direct costs and expenses.

Of course, the better finances are managed, the easier it will be to give a lender documentation they want to see. For example, using accounting technology  and the professional insight of an A Team accountant affords in-depth financial reports a lender would appreciate. 

When A Business Should Seek Financing

The general rule for when to seek small business financing is to only seek funding for a problem or an opportunity. If expenses surpass revenue or juggling cash flow to meet payroll is too much of a challenge, this may be a problem financing can solve. 

Financing can also provide more opportunities. For instance, maybe a business has the potential to enhance revenue with new inventory but doesn’t have enough funds to invest. Likewise, maybe an opportunity to enhance operational efficiency with new financial software will require funding that the existing budget can’t afford.

3 Types Of Small Business Financing

1. Business Line Of Credit  

Best Used For: Operating capital, inventory

Who Offers This Type Of Financing? Banks, asset-based lenders

A business line of credit allows a small business to borrow up to a specific amount as-needed. The lender only charges interest on the amount borrowed, creating a line of credit much like a personal credit card. Therefore, instead of getting one lump sum all at once, the business can take only what is needed.

Most lines of credit are set up in two phases. First, the lender and borrower enter the draw phase, which means the borrower can use funds as needed. A minimum monthly payment may be required. Beyond this point, the repayment phase begins. The borrower is then expected to make predetermined payments to repay the loan.

Possible Risks To Consider  

• May involve high interest
• Can involve expensive additional fees
• Covenants can be hard to meet

2. Factor-Based Lending (Accounts Receivable (AR) Lending)  

Best Used for: Operating capital

Who Offers This Type Of Financing? Factoring companies, accounts receivable finance companies

Factor-based lending involves securing funding by using unpair invoices as collateral. There are different types of AR loans used in small business financing. Most often, the lender will offer a fraction of the actual value of the receivables. For example, the lender may only offer a loan of 80 percent of what ARs are worth. AR loans are short term, and they should only be used when a business is positive a receivable will indeed be paid.

Possible Risks To Consider  

• If the ARs are unpaid, the borrower is still responsible for the debt
• Fees and expenses can be costly
• Costs of repayment can go up substantially the longer an AR goes unpaid

3. Small Business Administration(SBA) Loans 

Best Used for: Operating capital, inventory, or equipment

Who Offers This Type Of Financing? Banks and SBA lenders

SBA loans come from SBA-approved lenders like micro-lending establishments and banks. In order to get approved, applications must be approved by the third-party lender and the SBA. With SBA loans, the SBA offers a guaranty that a portion of the loan will be covered if the business owner doesn’t repay. Therefore, this type of small business financing can sometimes be easier to obtain. One perk of SBA loans is the SBA caps how much interest can be charged.

Possible Risks To Consider  

• Overly high fees
• Inability to make required payments
• Personal liability if the business cannot repay

Enhance Chances Of Approval For Small Business Financing

Small business financing may be harder to obtain, but still doable. Making sure business financial are in check is a good first step toward getting approved for the funding you need. Need help? Contact The A Team  to start the conversation about how our solutions can help.